2010 Foodservice Industry Forecast: Achieving Stability

As foodservice companies begin their 2010 planning, two questions are top of mind: Has the 2009 economic mudslide been as severe as many foodservice professionals projected? More importantly, is it finally over?

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The National Restaurant Association (NRA) reports there are roughly 945,000 eating and drinking establishments throughout the U.S. And according to census data released by foodservice-research firm NPD in July, that number shrank by 4,000 by the spring of this year. That means despite the uniquely challenging business environment, the actual number of foodservice operations declined by only 1 percent on a year-over-year basis.

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The NRA also projected 2009 restaurant industry sales growth of 2.5 percent, and for the first six months, the growth rate was 2.1 percent, according to Hudson Riehle, NRA’s senior vice president of research and information services division. Riehle expects the second half of the year to be better, meaning it’s feasible for the industry to achieve the NRA’s projected 2.5 percent growth rate for the year. But even with the increase, the industry still would show a second consecutive year of real negative growth. One wonders if the industry has hit bottom.

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“It’s becoming quite clear now that the acute phase of the entrenchment is in the past,” Riehle says. “The restaurant operator’s ability to adapt to continuing changing market conditions ensures that consumers will continue to patronize them. Consumers have continued to spend money on meals prepared away from the home in their daily routines, albeit at lower levels. There are encouraging signs that consumer confidence will increase and that this is just a pause in that trend.”

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Realizing that business conditions are starting to stabilize, 91 percent of the foodservice operators surveyed by FE&S for its 2010 Forecast Study expect their sales to increase or remain consistent with this year’s levels next year. A more modest 63 percent predict their gross profits will increase or stay the same in 2010. Those operators projecting an increase in gross profit estimate the average rate of 9.6 percent.

The foodservice equipment dealer community shares operator sentiment that business conditions are showing improvment. For example, 78 percent of dealers surveyed for FE&S’ 2010 Forecast Study project that next year’s sales volume to increase or stay the same. In addition, 74 percent of dealers project their gross profits will increase or stay the same in the year ahead.

“A lot of the dealers I have spoken to in the last couple of months have been positive,” says Kim Gill Rimsza, president of TriMark/ Gill Marketing, and president of the Food Equipment Distributors Association. “Yes, their business is down but they are starting to see increased activity. Customers are still calling and they are selling some product. They feel like we have hit bottom.” While the industry may show signs of stability, that doesn’t assure a period of rapid recovery. “From the operator and consumer segment, there are still forms of anxiety that will affect both camps beyond the next three to six months,” Riehle says. The NRA’s Restaurant

Performance Index remains near historic lows, nowhere near the levels that would indicate a normal growth environment. Another key indicator that will lead the industry back to real economic growth is the employment situation. “This is critical for two reasons, Riehle says. “It increases consumers’ need for convenience, which impacts dayparts. It also impacts household income.” Riehle estimates that the U.S. must find employment for 10 million to 14 million people for the economy to be back on par with 2006 levels. “That’s a substantial number of jobs,” he adds.

The tightness of the credit market also impedes recovery. “More than anything, it has affected our operator customers and thereby it affects us as dealers,” Rimsza says. “If you have a customer who wanted to expand or build a new restaurant, it’s almost impossible to get new credit.”

Although business conditions are not rapidly improving, the operating climate for the foodservice industry should not deteriorate. According to NRA projections, the GDP will grow by 1.5 percent to 2.0 percent in 2010 and consumer income growth should remain consistent with 2009 levels.

With recent history as a guide, the recovery process for the foodservice industry will be a slow and steady one. “If you look at the duration of past recessions, they averaged six to ten months, so they were relatively short. This recessionary period is already at a year and a half and counting,” Riehle says.

By many estimates it took the industry two years to recover from the 2001 recession. And because this economic downturn is deeper and wider than the previous one, it’s realistic to assume that this recovery will take longer. “Coming out of this will be a much more slow and progressive climb,” Rimsza says. “There are still some people doing everything they can to hang on, so I am not sure we have seen much of a shake-up yet.”

While activity levels seem to be on the rise, they have not resulted in a rise of new business being booked by dealers for 2010. According to FE&S’ 2010 Forecast Study, 56 percent of the dealers surveyed indicated they have booked less business for the coming year compared to the same time in 2008. Only 17 percent of the dealers report an increase in business booked for 2010.

“To be able to compare next year to two years ago, it’s not going to be that way for a while,” Rimsza adds. “Some of it depends on your backlog and your market segment. But when you look at the big projects, the ones that help with your booking log for next year, they are just not there like they were.”

The recovery rate hinges, in part, on the consumer mindset. “Consumers will still be more cautious in their spending. As a result, how they use restaurants will not parallel how they did before this recession,” says Riehle, who predicts 2010 to be the best operating year since 2007.

“Savvy restaurant operators in 2010 will focus on maintaining their operating cost structure and drive additional demand.” While the 2008 economic decline caught many members in the foodservice industry off guard, that was not the case in 2009; operators and dealers alike were able to brace themselves for turbulent times ahead. “The hype got the dealers to be better prepared early and make some of the hard decisions they were going to have to make,” Rimsza says.

“If there is one overall positive development that comes from a recessionary period in the restaurant industry it’s the self-examination process,” Riehle says. “As a result of this period of introspection, there are a number of operators who are more aware of their cost structures and they will use that knowledge moving forward. So when there is a recovery, that operation is ready to take advantage.”

In 2009, foodservice operators altered their purchasing behaviors in several ways. According to FE&S’ 2010 Forecast study, these efforts included increased use of contract purchasing; greater use of coupons, rebates and other incentives; more use of group purchasing; placing smaller but more frequent orders with suppliers, and purchasing more staple ingredients for from-scratch preparations.

According to Rimsza, the operators are not alone in their introspection. “It goes back to operators, dealers and manufacturers evaluating their businesses to define their customers; determining who are the good ones that add to their profitability,” Rimsza says. “Dealers are looking internally to see how they can make their businesses stronger and emerge from the recession stronger.”

Foodservice equipment and supplies dealers have altered their purchasing patterns, too. According to FE&S’ 2010 Forecast Study, the top five ways dealers coped were to maintain lower inventory levels; consolidate purchases with manufacturers for better pricing; make smaller, more frequent purchases from suppliers; make larger, less frequent purchases from suppliers for better discounts; and change minimum-order sizes for customers.

“We got off on such a bad foot and there was so much concern and uncertainty, as the year went on it became apparent it was not going to be as bad as we thought,” Rimsza adds.

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